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2012

On 28 December 2012, the Financial Services Agency of Japan announced that additional IFRSs were designated for use by companies voluntarily applying IFRSs in Japan.

The announcement has effectively included all IASB pronouncements issued up to 31 October 2012. This means that Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27 issued by the IASB on 31 October 2012 are now available for use in Japan. Consequently, IFRSs 'designated' for use by companies voluntarily applying IFRSs in Japan have become exactly the same as IFRSs as issued by the IASB as at 31 October 2012.

The designation of the investment entities amendments in Japan occurs amid on-going international consideration regarding adoption, with New Zealand and Australia considering additional disclosures that are likely to comprise the primary financial statements that would be produced under full consolidation. In fact, the question of whether the amendments will be adopted in Australia at all is still open to some extent. In Europe, the European Financial Reporting Advisory Group (EFRAG) has recently issued a positive draft endorsement advice regarding the amendments.

at the latest from the commencement date of the first financial year starting on or after the date of entry into force of the Regulation (the third day following that of its publication in the Official Journal)

at the latest from the commencement date of the first financial year starting on or after the date of entry into force of the Regulation (the third day following that of its publication in the Official Journal)

The rapid global growth in Islamic finance has brought increased international attention to the questions of what Islamic finance is, how it differs from conventional finance and and whether accounting for Islamic and conventional finance transactions can be harmonised.

The papers for the AAOIFI - World Bank Annual Conference on Islamic Banking and Finance held earlier this month and recently posted to the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) website offer a good overview of current topics in Islamic Finance. However, they also illustrate that the definitions of Sharia-compliant operations are still diverse and can differ from jurisdiction to jurisdiction, which make a single approach to accounting difficult. Yet, as one of the speakers at the conference pointed out: "Ethics, transparency and accountability are values not alien to [the] Islamic world view." Please click for access to the conference papers on the AAOIFI website.

The need to harmonise the treatment of Islamic finance first in itself and then with international standards has lead to the publication of a series of papers over the last months. In September 2012, the Islamic Financial Services Board (IFSB) published a report from a high-level roundtable offered jointly with the International Organisation of Securities Commissions (IOSCO), which was to be a first step towards the development of international regulatory standards for Islamic capital market products. In November 2012, the Malaysian Accounting Standards Board (MASB) published a staff paper discussing Islamic finance, accounting treatments for various Islamic finance instruments, and the reasons why the MASB chose to require Islamic financial institutions to follow Malaysian Financial Reporting Standards, which are equivalent to IFRS.

Finally, the Association of Chartered Certified Accountants (ACCA) followed suit with a report published on its website calling on the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance, standards and educate the investor community on key issues. ACCA points out that:

the IASB should consider issuing guidance on the application of IFRSs to the accounting for certain Islamic financial products;

it should also consider issuing guidance on additional disclosures in relation to Sharia-compliant operations;

the IASB should work with leading Islamic Finance standard-setters and regulators in establishing differences and developing harmonised solutions; and

the Islamic Finance Institutes (IFIs) should support the IASB by forming an expert advisory group.

The IASB has responded to the repeated calls and has asked the MASB to help with setting up an expert advisory group on Islamic accounting. This development was first announced at the fourth meeting of the Asian-Oceanian Standard-Setters Group (AOSSG) at the end of November 2012 in Kathmandu where the IASB staff briefed the members on the plans. The IASB has since confirmed these plans in the feedback-statement to the agenda consultation:

The IASB could benefit from learning more about Islamic (Shariah-compliant) transactions and instruments - neither the IASB nor our staff have expertise in this area. The IASB is establishing a consultative group to assess the relationship between Shariah-compliant transactions and instruments and IFRS and to help educate the IASB, mainly through public education sessions. Work undertaken by some standard-setters suggests that IFRS provides relevant information about Shariah-compliant transactions and that there is little, if anything, the IASB would need to do to bring this sector of the economy within IFRS. However, the IASB needs more information before it can make that assessment itself. We have asked the Malaysian Accounting Standards Board to assist us with setting up this group, reflecting the helpful analysis they provided to the AOSSG on Shariah-compliant matters.

More information on developments in Islamic accounting and useful links are available on our dedicated IAS Plus page.

In October 2011, the European Financial Reporting Advisory Group (EFRAG) and the Organismo Italiano di Contabilità (OIC) published a discussion paper 'Accounting for Business Combinations under Common Control'. They have now released a feedback statement with an analysis of the comment letters received, together with EFRAG’s and OIC’s responses to the issues raised by respondents and the way they have decided to further develop the project.

There were mixed views on whether the DP achieved all of its objectives. Although there was agreement about the DP stimulating debate on BCUCC.

A number of respondents noted that the scope of the DP was too narrow and additional issues should have been considered (especially other types of transactions under common control).

Respondents also expressed the view that the project should include in its scope how to account for BCUCC in the separate financial statements.

Many respondents stated that the project’s effective development would be greatly aided by considering real-life examples of BCUCC.

Most respondents asked for a common definition of BCUCC transactions to be provided.

Mixed views were expressed about the approach taken in the DP. Some supported the approach taken. Others expressed the view that the analysis should not have been limited to the current IFRS literature, but rather should have taken it as a starting point.

The majority agreed that the information needs of users are an important consideration when determining an accounting method for BCUCC.

Regarding the accounting methods used in practice, almost all respondents noted that either predecessor or acquisition accounting are prevalent.

Generally respondents supported diversity of accounting treatment when facts and circumstances merit it. However, it was a common view that whatever method is chosen, it should be applied consistently.

Some respondents held the view that the economic substance of BCUCC transactions should determine the accounting method and the recognition of certain items as part of equity.

EFRAG and the OIC agreed that further work in their overall project on BCUCC is needed and would encompass the review of real- life examples to see whether they provide a basis for categorizing BCUCC into different types of transactions, for which different accounting treatments should apply. If this is successful, indicators of difference in economic substance may be eventually drawn from this exercise. Also, EFRAG and OIC will work further on defining what a business combination under common control is.

Paul A Beswick, the Acting Chief Accountant at the US Securities and Exchange Commission (SEC), has been named to the position permanently. Mr Beswick, so far the SEC Deputy Chief Accountant, had been serving as Acting Chief Accountant since James L Kroeker left the Commission in July.

Mr Beswick served as staff director of the multi-year effort to help the Commission evaluate the implications of incorporating IFRSs into the financial reporting system for US companies. The SEC final staff reportWork Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers was published on 13 July 2012.

Apart from general comments regarding the importance of the SEC's decision on IFRS, Mr Beswick gave little away over the last months in terms of the next steps the SEC might take. In his speech at the American Institute of CPAs (AICPA) 2012 Conference on Current SEC and PCAOB Developments he merely expressed an expectation of working with the new SEC Chair, Elisse B. Walter, and existing SEC Commissioners and commenting that people should "please stay tuned".

Peter Clark, the IASB's Research Director, has written an article outlining research opportunities for academics in connection with the IASB's new research phase.

As a result of the agenda consultation 2011 the IASB concluded that a new research phase would be included in the process for developing standards. The use of research and gathering evidence is not new to the IASB, but the IASB now intends to place its research on a more structured footing to make it easier for the IASB to gain access to the wealth of expertise and information that exists in the research community.

Peter Clark, the IASB's Research Director, has written a short article summarising how the IASB intends to approach research and what role academics can play in the IASB’s research. Academics can for example help the IASB by bringing financial reporting problems to the IASB's attention - for instance by contributing to the public agenda consultation, which is intended to take place every three years going forward. Also, the IASB has identified several research topics it intends to work on:

When academics are researching an area of interest to the IASB, such as those identified above, the IASB would welcome information about that research.

The IASB is well aware that rigorous empirical research requires a long lead time and that academics may be reluctant to research topics that do not provide adequate incentives, for example a reasonable prospect of being able to publish the output of the research in a form that will provide them sufficient credit. The IASB will consult academics to seek ways of overcoming these impediments.

Please click to download Peter Clark's thoughts and comments on the IASB's new research phase and the opportunities it offers for academics: The IASB’s research activities.

The European Financial Reporting Advisory Group (EFRAG) has issued draft comment letters on two items: the IASB’s Exposure Draft ED/2012/3 'Equity Method: Share of Net Asset Changes' and the IFRS Interpretations Committee’s tentative agenda decision on IAS 39 regarding the implications of negative interest rates for presentation in the statement of comprehensive income.

IASB ED/2012/3

In relation to ED/2012/3, EFRAG agrees that diversity in practice exists on how investors should recognise their share of the changes in the net assets of an investee that are not recognised in profit or loss or other comprehensive income of the investee, and are not distributions received.

EFRAG members have three views on how these other net asset changes should be recognised:

View 1 - Agree with the IASB's proposal that other net asset changes are recognised in equity and reclassified to profit or loss when the investor discontinues the use of the equity method. This view effectively considers equity accounting to be a 'one line consolidation'

View 2: The investor should only recognise changes in the investee’s net assets that arise from profit or loss, other comprehensive income and distributions received. This view sees equity accounting as a 'valuation method' and other net asset changes are considered equity transactions that are unrelated to the investor and which should therefore not affect the investor’s accounting under the equity method

View 3: The investor should account for the investee’s other net asset changes that result in indirect decreases and increases in the investor’s ownership interest in the same way as actual disposals and acquisitions of interest in the investee. Under this view, the IASB's proposals are seen as inconsistent with concepts and principles in IFRS (such as the limits of consolidated groups), and treating these changes as acquisitions and disposals is considered consistent with existing practice.

Reclassification to profit and loss would only occur under View 1.

Comments on the draft comment letter close on 28 January 2013. Because EFRAG has split views on the proposals in ED/2012/3, EFRAG is requested specific feedback on which view expressed above should be supported.

EFRAG has decided to comment on the IFRS Interpretations Committee tentative decision on the implications for presentation of negative interest rates.

EFRAG raises the following concern about the tentative agenda decision:

In our view, the wording for rejection used by the Committee in its publication of the ‘IFRIC Update’ to explain the agenda rejection is in itself akin to an interpretation. We urge the IFRS Interpretations Committee not to issue any rejection notice that would be akin to an interpretation. While rejection notices have no authoritative status, in practice, regulators do refer to rejection notices in the exercise of their enforcement responsibilities. In Europe, ESMA considers rejection notices to be part of the IFRS literature that preparers should comply with.

The IFRS Foundation Education Initiative has developed a training module for Section 9 of the IFRS for SMEs 'Consolidated and Separate Financial Statements'. This section defines the circumstances in which an entity presents consolidated financial statements and the procedures for preparing those statements. It also includes guidance on separate financial statements and combined financial statements.

Ultimately, the IFRS for SMEs training material will include 35 stand-alone modules – one for each section of the IFRS for SMEs. Currently, 32 modules are available. Most are also available in Arabic, Russian, Spanish, and Turkish.

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments. The latest report follows the issue of EFRAG's draft endorsement advice on the IASB's investment entities amendments, in which EFRAG’s initial assessment is that the amendments satisfy the technical criteria for EU endorsement and EFRAG should therefore recommend their endorsement.

In its draft endorsement advice on the investment entities amendments, EFRAG notes the following on the question of the exemption from consolidation:

EFRAG generally believes that a reporting entity should not differentiate between types of entities when applying the control model of consolidation in IFRS 10 Consolidated Financial Statements. However, EFRAG notes that the Amendments respond to the concerns of users of financial statements, who expressed support for a consolidation exception for subsidiaries of investment entities, and argued that their interests are best served by having a single line measurement basis based on fair value, instead of consolidation of subsidiaries of investment entities.... Although EFRAG acknowledges... concerns, we believe that limiting the use of the exception to investment entities as defined under the Amendments, does not affect the relevance of information produced by those entities, and therefore should not preclude the information provided under the Amendments from meeting the relevance criterion.

In accordance with its usual technical analysis, the draft endorsement advice also considers the investment entity amendments in terms of reliability, compatibility, and understandability before noting "EFRAG’s overall initial assessment is that the information resulting from the application of the Amendments would not be contrary to the true and fair view principle".

Comments on the Invitation to Comment on EFRAG's draft endorsement advice are requested by 28 January 2013.

The Australian Accounting Standards Board (AASB) has released an exposure draft outlining its proposals of how to implement the IASB's investment entities amendments in the Australian context. The exposure draft proposes the use of additional disclosure, but notes "AASB members were split between the... options when considering how best to proceed". The exposure draft outlines two alternate views, including one which could lead to the investment entities amendments not being adopted in Australia.

Consistent with the AASB's prior deliberations, the proposals in the body of Exposure Draft ED 233 Australian Additional Disclosures - Investment Entities would see the issue of the investment entities amendments, together with additional Australian-specific disclosure requirements.

The additional disclosures would require:

a consolidated statement of profit or loss and other comprehensive income

a consolidated statement of financial position

a consolidated statement of changes in equity

a consolidated statement of cash flows

a summary of the significant accounting policies used in preparing the above consolidated financial statements.

The consolidated financial statements would include controlled investees despite the investment entities exception to consolidation requirements provided in AASB 10 Consolidated Financial Statements (equivalent to IFRS 10). No exemption from the disclosure requirement would be provided under the AASB's 'reduced disclosure requirements'.

Alternative View 1 - effectively arguing against adoption of the investment entities amendments, as the AASB members holding this view consider them "a violation of the basic principle that an entity should account for all of its assets, liabilities, income and expenses". Other concerns expressed include a lack of a rigorous definition of an 'investment entity' and complication of accounting requirements by adding exceptions

Alternative View 2 - immediately issue in Australia the IASB’s investment entity requirements as made by the IASB, without imposing additional disclosure requirements that "imposes significant additional costs on Australian investment entities relative to their international counterparts". AASB members supporting this view nevertheless would accept the disclosure proposals in the exposure draft in order to retain Australia's compliance with IFRS.

The proposals are open for comment until 29 March 2013. Click for (links to AASB website):

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